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Given the supply chain disruption caused by the Covid-19 pandemic, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled. Counterparties (especially suppliers) to such contracts may seek to delay and/or avoid performance (or non-performance liability) of their contractual obligations and/or terminate contracts, either because Covid-19 has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to extricate themselves from an unfavorable deal.

Further, companies may not be able to perform their obligations under their customer agreements because of their suppliers’ non-performance and may in turn seek to delay and/or avoid performance (or liability for non-performance) of their contractual obligations and/or terminate contracts. Parties may also cite Covid-19 as a basis for renegotiation of price or other key contractual provisions (e.g. volume of materials exported from or imported into affected areas due to shifts in supply and demand).

In this context, it is important to determine if Covid-19 will be considered as a ‘'force majeure'’ event.

The law relating to Force Majeure (a French phrase that means a '‘superior force'’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. It is a contractual provision agreed upon between parties. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Typically, force majeure events include an Act of God or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, pandemics, etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force Majeure is an exception to what would otherwise amount to a breach of contract.

Whether a contractual obligation can be avoided on the grounds of force majeure is a factual determination based on the specific terms of the contract. The courts would examine, whether in each case, impact of Covid-19 pandemic prevented the party from performing its contractual obligation. Indian courts have generally recognised this concept and have enforced it where appropriate.

The law in India has been laid down in the seminal decision of the Supreme Court in the case of Satyabrata Ghose vs Mugneeram Bangur & Co. (AIR 1954 SC 44). The entire jurisprudence on the subject has been well summarised by Justice R.F. Nariman of the Supreme Court in a recent decision in the case of Energy Watchdog vs CERC (2017) 14 SCC 80.

A force majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract and protection afforded will depend on the language of the clause. In the event of a dispute as to the scope of the clause, the courts are likely to apply the usual principles of contractual interpretation.

A Covid-19 pandemic could make it more difficult for parties to perform their contractual obligations.

There are two possible instances, which may suggest that a force majeure clause covers a pandemic:

(a) if the contractual definition of a force majeure event expressly includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide clarity as to whether Covid-19 outbreak would trigger a force majeure clause in a contract; or (b) if the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party.

What are the other constraints faced by the companies?

A) Failure on the part of supplier leading to the company’s failure

B) Renegotiation of price and terms of the original contract

C) Both (a) and (b) 

D) Neither (a) nor (b)